Research

Research Center on International Cooperation of the University of Bergamo
Giordano Dell-Amore Foundation
EQUITY MARKET PERFORMANCE IN BANGLADESH: AN EVALUATION / ÉVALUATION DE

LA PERFORMANCE DU MARCHÉ BOURSIER AU BANGLADESH
Author(s): M. Farid Ahmed
Source: Savings and Development, Vol. 22, No. 1 (1998), pp. 67-93
Published by: Giordano Dell-Amore Foundation
Stable URL: http://www.jstor.org/stable/25830643
Accessed: 19-09-2016 03:46 UTC
REFERENCES
Linked references are available on JSTOR for this article:
http://www.jstor.org/stable/25830643?seq=1&cid=pdf-reference#references_tab_contents
You may need to log in to JSTOR to access the linked references.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted
digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about
JSTOR, please contact support@jstor.org.
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
http://about.jstor.org/terms
Research Center on International Cooperation of the University of Bergamo, Giordano

Dell-Amore Foundation are collaborating with JSTOR to digitize, preserve and extend access to Savings
and Development
This content downloaded from 132.236.27.217 on Mon, 19 Sep 2016 03:46:19 UTC
All use subject to http://about.jstor.org/terms
EQUITY MARKET PERFORMANCE IN BANGLADESH:
AN EVALUATION
M. Farid Ahmed
Nagasaki University
1. Introduction
With the rapid transformation of economic structure, policy and institution on a global
scale in the recent past, the role of securities markets as intermediary between the investor
and entrepreneur is getting increasing importance. However, literature on equity markets
of developing countries has not been extensive. Wai and Patrick (1973) is a widely referred
paper on this issue who favors its development rather with caution. Drake (1980, 1977,
1985) supports the stock market development. Although Samuels (1981) and Samuels
and Yacout (1981) appear to be supportive of stock market development but indicate that
they are inefficient and may result in increasing inequality in income and wealth distribu
tion. Calamanti (1983) and Parkinson (1984) emphasize the limited role of an equity
market in raising new capital in a developing economy. It is generally agreed that an equity
market under general equilibrium plays a very important role in an economy in collecting
and allocating funds in an efficient manner. In order to ensure these economic activities
in developed economies an equity market has or should have a significant link to the
overall economy (Baumol, 1965). The equity market also reflects investors' attempt to
forecast economic trends. It is evident that the equity market and economic activity move
in a similar cyclical pattern (Moore, 1975). It is also recognized that the stock price index
is a major component of the leading indicators of the economy (Zarnowitz and Boschan,
1975). If the major problem in the process of development is to increase the level of savings
and to channel those savings into productive investments, then the mechanism of the
capital market is a crucial intermediary element in the process of growth. But it is not an
easy task to establish an adequate and efficient capital market. Efficient operation of the
capital market is required to meet at least two basic requirements. First, it should support
industrialization through savings mobilization, investment fund allocation and maturity
transformation. Secondly, it must be safe and efficient in discharging the above role. In a
developing economy such conditions usually do not prevail due to prevalence of informal
credit markets that tend to limit the capacity to mobilize financial savings, a low degree of
ownership-management separation associated with the drawbacks of informational
asymmetry and a low level of accumulated financial assets making maturity transforma
tion more difficult. Of course, these conditions differ widely from economy to economy.
Substantial economic underpinnings consistent with market economy and liberaliza
tion have been witnessed in Bangladesh over the last few years, but the development of
stable and efficient capital markets has not been attained. Although equity market records
an increasing trend both in terms of number of the companies listed in the stock exchange
and their market capitalization, a careful investigation into its performance casts doubt
about its adequacy, efficiency and effectiveness. In the following sections an attempt has
been made to evaluate the performance of equity markets in Bangladesh.
67
SAVINGS AND DEVELOPMENT - No. 1 - 1998 - XXII
2. Relative Shares of Securities in Fund Mobilization
In recent years optimism about an expeditious upgrading of the equity segment of

capital markets of Bangladesh has been observed among some quarters. This may,
perhaps, originate mainly from the persistent accumulation of bank deposits and heavy
oversubscription rate of corporate securities over the past few years. Within a general
framework, the significance of a stock market stems from its perceived classical role of
allocating funds to the most productive sectors of the economy. Thus it is imperative that
a stock market has or should have important links to the overall economy in which it works
(Ando and Modigliani, 1963). According to the life cycle theory of Ando and Modigliani
households project their resources or wealth over their expected life time and decide
consumption flows that best suit their preferences. Part of the household wealth is held in
the form of stocks. An increase in stock prices produces corporate gains resulting in higher
wealth, which in turn results in additional consumption expenditures (see Bhatia, 1972).
In Bangladesh, households are the largest group of shareholders although stock as a
percentage of overall household wealth has always been small in the portfolio composition
of stock investors (Ahmed et al., 1993), not to speak of the general public. Naturally, the
impact of stock price changes on the household consumption should be insignificant.
Another factor that might lead to this outcome is the pattern of distribution of stockholders
in Bangladesh across wealth classes. The distributions of stockholding in Bangladesh are
skewed in the direction of the relatively wealthy (Ahmed et al., 1993), who, it is argued, are
less sensitive to the increases in stock prices when undertaking consumption decision,
because of lower marginal propensities to consume (Arena, 1965). Recognizing the highly
skewed ownership structure of Bangladesh companies, of late, the authorities have
reserved 55 percent of Initial Public Offerings (IPOs) for the minimum lot of Tk.5,000.00,
all capital gains on disposal of securities and dividend income up to Tk 30,000 have been
tax exempt, restriction on sale of shares at a premium has been withdrawn and so on.
An understanding of the equity market performance may be conceived by examining
its relative contribution in resource mobilization. The extent to which the equity markets
have been successful in mobilizing additional resources can be directly analyzed with
reference to the share of corporate security issues to funds mobilized by other investment
opportunities available like the banking system and various other government saving
schemes.1 Table-1 presents the share of corporate securities in Bangladesh. As can be
1. Government savings schemes include Bangladesh Savings Certificates, Defense Savings Certificates, Bonus
Savings Certificates, 8-year Bangladesh Savings Certificates, Wage Earners' Development Bond and Savings
Tickets which usually provide interest rates varying from 10 to 15% in recent years depending on scheme.
68
M.F AHMED - EQUITY MARKET IN BANGLADESH
seen, the proportion of funds raised via the stock markets are small relative to banking
system as well as government saving schemes. The increasing popularity of the equity
markets since 1982-83 ensued due to different tax incentives offered and denationaliza
tion policy adopted by government. The corporate bond market, came into being as a new
investment vehicle since 1987 and this market has not yet been broad based. Only eleven
companies have outstanding corporate bonds (partly redeemable and partly convertible)
listed with Dhaka Stock Exchange (DSE) in June 1997. The attractiveness of bank
deposits was magnified due to high interest rates until 1991. Government saving schemes
were specially attractive due to high interest rates and tax exemption of income from this
source. However, after 1991 interest rates on government saving schemes and bank
deposits have been reduced significantly. Besides, tax benefits on government saving
Table 1: Funds mobilized by banking system, government saving schemes and stock markets in Bangladesh - (In million taka)
Corporate Bank deposits Govt. saving Total of Ratio (col. 2

securities* (time deposits) instruments col. 3 and 4 as % of col. 5)
(1) (2) (3) (4) (5) (6)

1975- 76 137.5 5147.0 424.3 5571.3 2.47
1976- 77 230.5 7670.0 485.3 8155.3 2.83
1977- 78 281.3 9169.0 512.7 9681.7 2.91
1978- 79 365.0 12352.0 609.3 12961.3 2.82
1979- 80 405.8 15131.0 654.3 15785.3 2.57
1980- 81 528.1 21497.0 1086.1 22583.1 2.34
1981- 82 726.5 25366.0 1062.3 26428.3 2.75
1982- 83 1001.5 32639.0 1212.6 33851.6 2.96
1983- 84 1586.6 48359.0 1414.0 49773.0 3.19
1984- 85 2059.7 63024.0 1553.0 64577.0 3.19
1985- 86 2653.0 74102.0 1913.4 76015.4 3.49
1986- 87 3149.6 90903.0 2381.2 93284.2 3.38
1987- 88 3663.7 113603.0 3600.4 117203.4 3.13
1988- 89 4539.2 136174.0 4504.6 140678.6 3.23
1989- 90 5361.1 159289.0 5831.5 165120.5 3.25
1990- 91 5586.6 178807.0 8663.6 187470.6 2.98
1991- 92 6020.3 202686.0 13206.1 215892.1 2.79
1992- 93 8201.7 224730.0 26925.9 251655.9 3.26
1993- 94 11673.0 252359.0 25822.4 278181.4 4.20
1994- 95 19438.0 290330.0 27822.1 318212.1 6.11
1995- 96 23052.4 312310.0 34614.7 346924.7 6.64
1996- 97 26907.4 337700.0 31551.2 369251.2 7.28
(June '97) (Feb '97)
Figures are for calendar years.

Source: Calculated from various issues of DSE Monthly Reviews, Bangladesh Bank Bulletin, Economic Survey of Bangladesh, 1997
and Directorate of National Savings, Ministry of Finance, Government of Bangladesh.
69
schemes have lately been withdrawn totally. This might have reflected in a higher share
of corporate securities in recent years.
Government bonds in Bangladesh are not traded on the stock exchanges of the
country. Rather the government regulates its markets through certain specified bank
counters. The exclusion of these bonds from the trading of the stock exchanges deprives
them of these businesses. The physical separation of the two markets does not encourage
investors to make direct comparisons between government bonds as riskless assets and
equities as risky assets. This is not compatible with the investment efforts of rational
investors. They tend to hold a portfolio combining different types of assets consistent with
their perceptions of expected returns and risk. This segmentation of the markets is unlikely
to be conducive for securities market development.
Table-2 contains the ratio of new equity issues to gross domestic investment along with
some activity ratios. Drake (1980) has suggested that the ratio of new issues to gross
capital formation can provide a measure of the financial development, while Kitchen
(1993) has suggested the use of various activity ratios as an indicator of financial
development. In Bangladesh, the share of new equity issues to gross domestic investment
is a fraction of 1 percent2. This share shows an increasing trend in recent years. The
turnover/GDP ratio of listed securities is also very low representing less than 1 percent in
general although it has shown an increasing trend. This may, perhaps, be due to various
incentives for encouraging equity investment and financial market liberalization policy
declared by government together with lowering down the interest rates and withdrawal of
tax benefits from different debt securities. The ratio of stock transactions to GNP in
developing countries is usually a fraction of 1 percent with the exceptions of Taiwan,
Singapore, Korea and Brazil. The ratio on the larger stock markets in developed countries
frequently exceeded 10 percent, although low values were also recorded on the smaller
European markets (Wai and Patrick, 1973, Table II).
Similar results can be obtained if the ratio of new equity to national saving is considered
as Table-3 presents. In general, then, it may be concluded that the equity market has not
been able to provide a strong alternative to the banking and various government saving
schemes for mobilization of funds for the period under consideration in spite of adopting
various measures including tax incentives favoring the development of equity markets.
The contribution of the equity markets to financial development represented by the ratio
of new issues to gross investment as well as to national saving has not been significant.
2. The gearing effect of new equity needs to be taken into consideration in measuring its contribution. That is, if the
ratio of debt and equity is 3 to 1, then every Tk.1 raised in new equity means total investment of Tk. 4.
70
Table 2: Ratio of new equity issues to gross investment and listed securities turnover to GDP (In million taka)
Year GDP Gross investment New issues* Turnover of Turnover/GDP New issues/
listed securities ratio (%) gross investment
ratio (%)
1985- 86 466,230 58,850 194 34.3 0.007 0.33

1986- 87 539,200 69,490 81 152.4 0.028 0.12
1987- 88 597,140 74,310 265 120.8 0.020 0.36
1988- 89 659,600 85,190 303 154.3 0.023 0.36
1989- 90 737,570 94,430 239 187,7 0.025 0.25
1990- 91 834,390 95,960 158 100.4 0.012 0.14
1991- 92 906,500 109,850 167 261.0 0.028 0.15
1992- 93 948,065 128,370 115 403.6 0.043 0.09
1993- 94 1,030,365 158,882 143 2,442.9 0.237 0.09
1994- 95 1,170,261 194,614 992 4,660.8 0.398 0.51
1995- 96 1,301,600 221,272 1,252 8,199.1 0.630 0.57
1996- 97 1,402,580 243,768 1,832 35,413.5 2.525 0.75
'Figures are for calendar years.

Source: Estimated from Economic Survey of Bangladesh, Ministry of Finance, Government of Bangladesh various issues DSE Fact
book 1994 and DSE Monthly Review-various issues.
Table 3: Ratio of saving to GDP and new equity to national saving
Year Ratio of saving to GDP (as percent) Ratio of new equity to national saving (as percent)
1985- 86 3.22 0.72

1986- 87 3.52 0.26
1987- 88 2.97 0.77
1988- 89 2.70 0.49
1989- 90 2.73 0.35
1990- 91 4.13 0.17
1991- 92 5.85 0.14
1992- 93 7.00 0.08
1993- 94 7.50 0.09
1994- 95 8.20 0.54
1995- 96 7.50 0.63
1996- 97 7.70 0.91
Source: Derived from Bangladesh Bureau of Statistics, Statistical Yearbood of Ban

Bangladesh (1996-97). Ministry of Finance, government of Bangladesh, DSE Fact
issues.
Much of the constraints associated with the equity markets are concerned with the
overall development of the country and hence investment in equities is likely to continue
to be some highly risky affairs for a great many potential investors with pronounced risk
aversion attitudes. The continuous increase in various government bond and bank
71
deposits has taken place while their respective yield was falling. In fact, the rate of interest
ranges from 14 to 19 percent for different savings instruments in 1990, had already been
lowered down to 6 to 13 percent since 1995. Nonetheless, this low rate of interest and other
policy measures could not produce remarkable change in the ratio of new equity. The
attitude of general investors behind such a trend reflects enunciated a risk aversion
tendency rather than irrationality. In the presence of forceful structural, legal and other
limitations, measures aiming at increasing the relative contribution of equities will most
likely be of negligible use. On the other hand, mechanisms that design to force industrial
corporations to resort to the new issue market are of questionable effectiveness, in view
of the relative difficulties to institute and execute them. Under these situations equity
markets of Bangladesh are likely to be restrained, despite enthusiastic efforts for its rapid
development. Accordingly, transformation of short term deposits into instruments of long
term debt and ownership need to be entrusted to a set of different institutions pending the
eventual development of the capital markets of Bangladesh. This deviation in focus has
substantial policy oriented implications.
3. Equity Market Activities in DSE

In order to offer shares for a public subscription in Bangladesh a company must apply
to the SEC for approval. The company so approved is then eligible to apply for listing on
the stock exchange. The stock exchange may list the security for dealings on the exchange
floor if it is satisfied after making such inquiry at it deems necessary to fulfill the conditions
prescribed for this purpose. Application for allotment of shares can be submitted in
prescribed form when a public offer is made by any company which is obtainable from the
bankers to the issue, stock exchanges and the company office. Only one application in one
name is permissible. If the applicant is allotted a share, he receives an allotment letter. He
can either retain the allotment letter until a share certificate is issued or dispose of the
allotment within renunciation period through broker signing the 'form of renunciation'
usually attached at the back of the allotment letter. However, the investor receives the
share certificate in exchange of the allotment letter subsequently.
Stock exchange is the legal platform for trading in the secondary market. Only listed
stocks are eligible for trading on the exchange floor. Public companies having paid up
capital of Tk. 10.0 million or more are required to be listed on the stock exchange. No
company with an issued and paid up capital of less than Tk. 1.0 million is listed on the stock
exchange while companies with paid up capital between Tk. 1.0 million and 10.0 million
can exercise their option for listing. The advantages of listing are increasing security's
72
prestige, more publicity through media, raising security's marketability and easy accessi
bility to bank loans, tax concession etc. In spite of these advantages many companies do
not prefer to be listed due to required disclosure of information, cost and necessary
procedural formalities attached to listing process, retaining control and so on. Trading is
conducted by the broker-members of the stock exchanges in Bangladesh. An investor can
buy or sell shares on the exchange floor only through a broker when he approaches a
broker to execute his order. DSE brokers are allegedly taking unnecessary long time to
execute the order which often goes against the interest of the investor. In order to execute
an order to buy or sell securities on behalf of his client, a broker is supposed to provide
services at the time of executing a sell order as well as provide services and funds for a
buy order. He charges a commission for such services which is 1 percent of the total value
of the transaction. Thus, the stock markets in Bangladesh predominantly operate through
the agents without any responsible market makers. The members of the DSE do not
operate margin accounts for general investors. There is no provision in the Bye-laws of the
Exchange for undertaking market making roles.
Trading takes place six days a week on the exchanges of Bangladesh. The market
operates through 'an open outcry' with broker-members seated around a table with no
access to outsiders. Dealing prices are recorded with a chalk on a black board by a
member of the stock exchange staff. By the standards of large stock exchanges in
developed countries, the technology is simple and not subject to technological failure. For
a market of this size, the trading arrangements can, by and large, serve the purpose.
Although the stock exchange brokers must carry out trading of the listed stocks on the floor
of the exchange in principle, off floor transactions are carried out through a kerb market
in Bangladesh, notably during recent times. Such trading is conducted during floor trading
hours as well as beyond trading hours among large number of interested investors
assembled outside the stock exchange. These transactions usually take place through
physical delivery of share certificates, very often at a distorted price. This has caused
fraudulent practices frequently that entrap people through trading on the false certificates.
The unregulated kerb market has exacerbated the stock market manipulation and inflicted
extensive damage to the overall market development efforts. In view of the growing size
of the market, frequent allegations about the market manipulation, and recent upsurges
followed by sharp downswings, credibility of the system as a whole has been brought into
question. It is expected that computerization of the trading system and introduction of a
central depository system (CDS) can bring improvement of the situation. Since physical
delivery of share certificates is not permitted under CDS people will be discouraged to go
73
to the kerb market and thereby the dominance of this market is expected to be reduced
to a large extent. Order flows are generated, although at least partially, by subtle
interactions of human activities on the floor, including behavior of the rivals, floor
atmosphere, floor gossips and so on. All these can hardly be held by computer implying
'overshooting' or 'undershooting' in prices if traders are just reacting to price moves on the
screen without well understanding the reasons behind such moves. The system, there
fore, needs to combine the advantages of the technology - efficiency, accuracy and speed
- with those of human interaction, visibility and information exchangeability on the trading
floor so that better market coordination with less price volatility can be ensured.
Very little research has been conducted on the ownership and trading patterns on DSE.
The widespread view is that most of the equities are tightly held by the families, relatives
and friends. The shares of Multinational Companies (MNCs) are owned by foreign parents
and government who usually tend to decline to sell their shares in the local markets.
Different informal estimates suggest that between 50-70 percent of equity is tightly held
by families, relatives and friends. Institutions appear to be less dominant in stock exchange
trading, although no reliable figures are available. According to informal estimates this
share accounts for about 20 percent (Bichitra, 1996). Anyway, all these estimates should
be treated with caution.
Yearwise market capitalizations and turnovers are presented at Table 4. Market
capitalizations also include corporate bonds which are very limited in number and issue
Table 4: Market capitalization, turnover and P/E muliples (In million Taka)
Year Market capitalization Turnover Turnover:market P/E multiples

(year end) capitalization (%) (average)
1984 2,256 10 0.44

1985 3,493 32 0.92
1986 5,731 48 0.82 10.30
1987 12,671 178 1.40 28.91
1988 13,557 130 0.96 8.07
1989 15,351 174 1.13 25.53
1990 11,486 195 1.69 12.09
1991 10,397 116 1.11 8.02
1992 12,299 438 3.55 8.87
1993 18,099 579 3.19 7.70
1994 41,771 4,288 10.26 23.12
1995 56,518 5,673 10.04 23.97
1996 168,106 30,131 17.92 86.07
Note: P/E Multiples are estimated at the end of December each year.
Source: Compiled from DSE monthly Review- various issues.
74
of preference shares has not yet been sponsored by any company. It appears that the ratio
between market capitalization and turnover has been below 4 till 1993. However, rapid
growth of turnover is observed in 1994 since then it is more than 10. The Table gives the
impression that the Bangladesh markets maintain a low ratio of market capitalization and
turnover in general compared with other emerging markets. Besides, total market
capitalization of DSE was $1.04 billion while it was $ 127.51 billion for India $12,26 billion
for Pakistan $ 191.78 billion for South Korea and $ 199.28 billion in Malaysia (Emerging
Stock Market Fact Book IFC, 1995). Those low figures suggest a small share of equity
markets and a low level of market activity.
Price-earnings (P/E) multiples are contemplated as criteria for investment decisions.
One of the common traditional indexes for investment decision is the dividend yield. A yield
emphasizes the dividend rate, however, P/E multiple goes one step further and under
scores the relationship between the potential profit per share and share price. Highest PI
E multiple is observed in 1996 by 1987 and the lowest in 1993 as Table 4 indicates. This
is consistent with the general price rise and general price fall respectively in these years.
But the P/E multiples display substantial volatility suggesting its weak relevance to the
market realities of Bangladesh. Thus it should not be considered an absolutely proper
measure for investment decision rather attention need to be paid to other measures like
price book ratios (PBRs).
Table 5 provides the statistics of annual volume and value of transactions in DSE. It
is to be kept in mind that a considerable volume of transactions will be 'forced sales' for
meeting some investors' need for cash. The rest may be considered in response to the
changing risk (market and unique) perceptions of the investors. As Table 5 shows,
transactions, both in terms of volume and value, have recorded a phenomenal upsurge in
most of the years except 1987-88 and 1990-91. The average annual rate of increases in
value is much higher than that of volume. The years 1986-87, 1993-94 and 1996-97
recorded an increase of more than 300% of their respective preceding years in terms of
value although the rate of increases is less than 200% in terms of volume. The implication
is that in the years of rapid upswing in the stock market, the price of stock rises more than
the volume. In most cases these situations are explained in terms of the existence of stock
price manipulation as a major factor. If we take the yearly average of 13 years under
consideration, the volume is small compared to other emerging markets. It is about Tk.
4,014 million or about US $ 90 million at the prevailing official exchange rate.
75
Table 5: Trends of transaction volume (Figures in thousand)
Year Volume Value
No. of shares Annual growth Amount in Taka Annual growth

and debentures (%) (%)
1984- 85 380 22,510
1985- 86 670 76.32 34,375 52.71
1986- 87 1,929 187.91 152,445 343.47
1987- 88 1,077 -44.17 120,877 -20.71
1988- 89 I, 666 54.69 154,366 27.70
1989- 90 2,693 61.64 187,783 21.65
1990- 91 2,251 -16.41 141,289 -24.76
1991- 92 3.824 69.88 261,077 84.78
1992- 93 4,319 12.94 403,608 54.59
1993- 94 II, 560 167.65 2,442,873 505.26
1994- 95 25,947 124.45 4,660,800 90.79
1995- 96 44,799 72.66 8,199,095 75.92
1996- 97 119,313 166.33 35,413,534 331.92
Average 16,956 77.82 4,014,971 128.61
Source: Compiled from DSE Monthly Review various issues.
4. Stock Price Indexes

Markets always try to discover true values despite efforts to conceal or distort them.
Bangladesh's capital market is not an exception. The efforts to force investment at high
levels than could be supported has usually been reflected in the poor performance of
stocks. The industrial performance is poor and as such capital markets could only reflect
such performance. A useful tool for studying the overall price behavior of market is a price
index. Both the DSE and Bangladesh Bank (BB) maintain share price indexes of the
shares listed with DSE. The BB's 'Index of Ordinary Shares of Companies Listed in the
DSE Ltd.' provides share price index taking different financial years as a base for different
periods. Both indexes rely on DSE's published price quotations to track prices of the
shares of listed companies. Although the two indexes do not always yield exactly the same
figures, they tend to agree in general.
DSE remained inactive during the First Five Year Plan (FFYP) period (1973-78) due
to government socialist policy adopted at that time. Although it resumed its operation in the
face of a very unfavorable condition in 1976, it did not get momentum for a considerable
time. Initially, equity prices were hesitant and could not gain much ground. Its operational
activities were also expanding very slowly. In terms of annual index it declined from 100
in 1978-79 to 99.48 in 1979-80. During the Second Five Year Plan (SFYP) period (1980
76
85) the price index rose steadily. By and large, the period was free from violent fluctuations
in equity prices though there were notable rises in prices in the face of a favorable situation
in the industrial sector primarily due to government policy support for private sectors and
denationalization. The Third Five Year Plan (TFYP) (1985-90) started with an optimistic
note. This was mainly as a result of the announcement of New Industrial Policy of 1986,
relaxation of the rules of import of raw materials and machineries, larger size of TFYP and
larger allocation to the private sectors and so on. The opening year of the plan period
(1985-86) witnessed a moderate rise in equity prices and the trend was considerably
accentuated in the year 1987-88 when the DSE all share price index doubled within a year.
Anticipations among investors for raising profits and dividends, emergence of a new class
of investors, hedge against inflation, denationalization and holding company policy of the
government, downward revision of interest rates, incentive schemes for export promotion,
growth prospects of certain industries, exemption of income tax on dividends of individual
shareholders, and reduction of corporate tax are the possible factors attributable for such
rising price. However, since July 1987 the stock markets of Bangladesh were experiencing
a bearish condition. Declining trends in most stock prices and the market index as well as
the volume of transactions are the evidences supporting the bearish market. According to
many knowledgeable stock market experts the damage was caused to the stock market
due to political unrest, natural calamities and unprecedented floods in 1987 and 1988. It
is believed by many that the market overreacted in this period without considering much
of the economic fundamentals (Seok and Park, 1992). TFYP (1985-90) period, in general,
may be regarded as a period of rising stock prices although the rise was by no means
steady. The Fourth Five Year Plan (FFYP) (1990-95) experienced fall in prices in its initial
years which deepened in 1991 and continued during most parts of 1992. The stock price
of Bangladesh underwent dramatic behavior. A sharp increase in general is observed for
the periods of 1987-89 and 1993-96 associated with rapid fall following these periods. The
aggregate behavior of stock prices reflects tone and temperament of the industrial sectors
and related policies. The price rise that followed the bear market of early 1990s may be
considered as an extension of ongoing reform policy of the government and firm
commitment for liberalization and private sector development. Macroeconomic factors
such as growth of the economy, increased flow of foreign exchange, deregulation of the
market, lowering of interest rates; microeconomic factors such as changing corporate and
financial strategies with introduction of fiscal and other incentives; institutional factors,
specially establishment of Securities and Exchange Commission (SEC), are considered
relevant to this.
77
Figure 1: Stock price trends in DSE
While prices appear to be violent particularly during 1987-88 and 1996-97, there have
been periods of sufficiently long duration in which the direction of the changes has shown
a remarkable consistency. The most serious event in the stock market of Bangladesh
occurred in 1996 when the market behavior was abnormally irrational. The price index
prepared by BB has shown an increase from 240 in January 1996 to 1,122 points in the
first week of November of the same year, more than four times increase in the index within
11 months. But it dropped to 850 points in December 1996 and again to 352 points in April
1997 as the Figure-1 shows. Fluctuations in share prices are usual phenomena throughout
the world. But the speed and magnitude as well as lack of effective measures to combat
such abnormality by the concerned authorities in this case are surprising. This abnormal
price rise has taken place ignoring all micro and macro economic fundamentals. The price
of shares of a company, having negative worth, increased three to four times. Even share
price of a closed company also increased. The abnormal rise in share prices created an
urge for mindless gambling among the various segments of people. Some people took the
situation to become rich overnight. Suddenly the market started experiencing nightmares
as the overpriced share market began sliding toward its rational level every day and
subsequently crashed. The alarming fluctuation created a serious tension among inves
78
tors and ultimately resulted in forced closure of floor trading for several days. It is difficult
to segregate any single factor responsible for this price upheaval rather a combination of
some factors including some policy issues might have contributed to such development.
The likely candidates that might have some bearing on it are price manipulation on the
exchange, lack of proper implementation of a circuit breaker, withdrawal of lock-in
system3, absence of institutional traders on the exchange, lack of aggressive campaigning
about the grave consequences of abnormal market behavior and so on.
It is possible that a temporary supply of or demand for an extraordinary large amount
of securities takes place sometimes. This may upset the balance between demand and
supply. In order to stabilize the market, it is necessary to conduct some price supporting
activities. Such activities are specially needed when the market is dominated by specu
lation and rumor. A circuit breaker implying a price limit and trading halt may work to
stabilize the market especially when investors behave rather irrationally. The implication
of the withdrawal of lock-in system is noteworthy because experience shows that countries
undertaking reform programs are prone to excessive foreign funds that ultimately prove
unsustainable usually resulting in recession, crisis in the financial markets and capital
flight. In the light of the experience of successful liberalization programs undertaken by
East Asian countries in 1960s and 1970s, for sustainable behavior of foreign funds,
appropriate regulations of cross-border transaction of financial capital need to be pursued
in the context of liberalization and stabilization policies currently being pursued in
Bangladesh. Wide and effective campaigning through mass media against irrational
market behavior and their consequences can produce favorable results vis-a-vis legal
measures should be instituted and executed effectively by the authorities concerned in
order to contain manipulation of stock prices.
5. Returns to Equity Investment

With the resumption of DSE activities since 1976, the structure of the Bangladesh
financial markets has changed and the number of listed securities has been increasing
gradually. Naturally, the functions of stock markets are getting increasing importance in a
freer market economy. It is, therefore, worthwhile to study the Bangladesh stock markets
with the objective to clarify whether or not the asset pricing model works there. This
insinuates thatthe risk-return relationship for the stocks listed on the DSE is to be examined.
3. Under lock-in system a foreign investor in shares can't sell his shares within a certain period of time. This was
introduced in view of the significant impact of the foreign funds on the relatively small market of Bangladesh.
However, with the change of government policy, this was abolished in the budget of 1996-97.
79
The hypotheses that there should be excess return (risk premium) for the riskiness of
security holding although a risk spectrum may be distorted with the change of socioeco
nomic conditions.4 The American evidence confirms the notion that common stocks are
appropriately priced relative to other less risky securities in the sense of their rates of return
being higher than on other securities. Ibbotson and Sinquefield (1976) have found that
U.S. common stocks returned 8.5 percent per year compounded annually over the period,
1926-74, whereas 3.6 percent for corporate bonds, 3.2 percent for long term government
bonds, and 2.2 percent for U.S. treasury bills, a rate which is approximately equal to the
rate of inflation. Excluding dividends, common stocks returned 3.5 percent per year and
the inflation adjusted stock returns were 6.1 percent per year, subscribing the notion that
common stocks were good hedges against inflation.
Investors receive return on common stock investment in three forms: cash dividend,
capital gain (loss), and distribution of capital in the form of rights offering and bonus shares.
If the holding period is reasonably long (say 5 years or longer) then an investor would be
expected to receive in all these forms. The overall returns one gets in the long run is called
'investment return'. If instead the holding period is short, say a month or greater, most of
the investor's return will be in the form of price appreciation (capital gain) or depreciation
(capital loss). As the stock prices are highly unpredictable, the short term common stock
returns are 'speculative' in nature. Speculative return is thus distinguishable from
investment return in that the former is highly unpredictable whereas, the latter is
reasonablely predictable (Malkiel, 1981). However, common stocks are generally viewed
as long term investment wehicles. The rate of return on equity during an investment period
is defined as the growth rate of the total market value of the stock from the beginning to
the end of the period. It can be calculated as a ratio dividing the sum of the capital gain (Pt
=Pt1) and the dividend (Dt) by the amount of the initial investment (Pt1) as Equation (1)
shows.
*,=(f'-f;-'^' . m
There are no ready-made return figures of stocks traded in DSE. Using the above
formula we have calculated the average annual market rate of return from the market index
prepared by BB and annual interest rate on time deposit for a period of 17 years from 1980
to 1996 at Table-6. The Table brings out that the average market rate of return for the
period is 28.40 percent while the corresponding interest rate on time deposit is 10.81
4. For instance, risk spectrums may be distorted with the change of an inflation rate and fixed return investment may
become less attractive than some equities.
80
percent. The average yearly rate of return of these years is found considerably higher than
the average yearly rate of interest on time deposit (considered as riskless). In some years
negative returns on stocks are also observed. The rate of interest varies from 5.00 percent
to 14.00 percent while the rate of stock returns varies from -7.97 percent to 113.78 percent
during the period under consideration. Thus, the variation for stock returns is also higher
than that of interest rates. In terms of standard deviation it is 3.41 for interest rates and
30.45 for stock returns. This subscribes the finance theory that higher risk is associated
with higher return and low risk with low return. It appears that stock investment in
Bangladesh is attractive although fluctuations in returns are observed. This is what we
mean by risk. Of course, after tax returns on various government bonds with a maximum
Table 6: Year wise rates of return from equity and rate of interest on time deposit (Figures in %)
Year Nominal equity return (%) Rate of interest2

Change in index Dividend yield1 Total
1978-79=100
1980- 81 3.41 14.45 17.86 8.25
1981- 82 5.09 16.85 21.94 14.00
1982- 83 4.96 15.10 20.06 14.00
1982-83=100
1983- 84 21.57 31.55 14.00
1984- 85 26.30 10.63 36.93 14.00
1985- 86 13.31 16.56 29.86 14.00
1986- 87 104.92 8.86 113.78 14.00
1986-87=100
1987- 88 37.65 6.76 44.41 13.25
1988- 89 12.02 2.65 14.67 13.25
1989- 90 -11.25 3.28 -7.97 13.25
1990- 913 -13.31 2.98 -10.33 10.50
1991- 92 11.36 4.86 16.22 10.00
1992- 93 4.81 5.46 10.27 8.50
1993- 94 77.47 5.26 82.73 6.00
1994- 95 -14.26 5.49 -8.77 5.00
1995- 96 27.82 4.79 32.61 5.50
1996- 974 30.75 6.21 36.96 6.25
Yearly average 19.47 8.93 28.40 10.81
Standard deviation 30.23 5.66 30.45 3.41
1. Dividend yields are estimated through aggregating all the dividends paid during a year on all equity stocks and dividing them by the
aggregate prices of all equity stocks at the start of the year.
2. Time Deposit interest rate is as at the end of June of the previous year and therefore the figures represent the return for making deposit
on 1 July and lending them for 1 year.
3. We have considered the minimum rate set by the monetary authority from 1990 since then individual banks have been allowed to
decide the interest rates on deposits.
4. Estimated as on 30 April 1997.
81
investment limit sometimes may be higher than equity investment in Bangladesh.5 When
we look into the annual rate of return, we find that a rising tendency is followed by a falling
one resulting in periodical fluctuation. Consequently, changes in rates of return do not
move in one direction as is expected.
Under certain assumptions Capital Asset Pricing Model (CAPM) for security i would
take the form as follows:
e{Ri)Rf+e[Rm-Rf) =-. [2]
cov [RifRm\
Substituting p. for-^?r-s Equation (2) can be restated as
var \rm}
e(Ri) = Rf^i(e(km-Rf)]j . [3]

expected return on security /,
riskless rate of return,
expected return on the market portfolio, and

beta coefficient which measures the systematic risk of security /.
According to Equation (3) in equilibrium, the expected rate of return from a security is
made up of the riskless rate plus the risk premium multiplied by the beta coefficient of the
relevant security or portfolio. For riskless investment, therefore, b,. would be equal to zero
and the investor's return is rr When b>0, investors' expected earnings would be higher
than i.e., [e[r m J-Rf j > 0. This represents a risk premium. Thus, the relationship may
be described1 by equation (4) assuming a risk-averse investor, who holds a diversified
holding which approximates to the market index. When E(R.) is substituted by e(rj, then
the value of 6 is 1 and the coefficient of market risk does not appear in this relationship
5. For long term government bonds with relatively high interest rates, options are usually open to individuals only
with certain maximum limit. This is aimed at encouraging the small savers who are justifiably feeling too exposed
to the risk of market manipulation and other abuses. However, interest rates on bank deposits and various
government bonds have been reduced significantly in recent times.
82
Table 7: Estimated return on ordinary shares listed with DSE (Percent per annum)
Year Total nominal return1 Annual inflation rate2 Real return4
1980- 81 17.86 12.33 4.93

1981- 82 21.94 16.08 5.05
1982- 83 20.06 10.14 9.01
1983- 84 31.55 9.51 20.13
1984- 85 36.93 11.20 23.14
1985- 86 29.86 9.82 18.25
1986- 87 113.78 10.32 93.79
1987- 88 44.41 11.43 29.60
1988- 89 14.67 8.02 6.16
1989- 90 -7.97 9.32 -15.81
1990- 91 -10.33 8.84 -17.61
1991- 92 16.22 5.07 10.62
1992- 93 10.27 1.38 8.77
1993- 94 82.73 1.77 79.56
1994- 95 -8.77 5.22 -13.29
1995- 96 32.61 4.07 27.43
1996- 97 36.96 5.743 29.53
1. Data source of this column is Table-6.

2. Inflation rates are estimated from the Consumer Price Index of middle class families at Dhaka. Data have been used from Bangladesh
Bank Economic Trends - various issues.
3. Estimated as on 30 April 1997 from Bangladesh Bank Economic trends, June 1997.
4.tionRealratereturns have been calculated through the following formula Q^r-lj * 100 where r is nominal return and i is an annual infla
as market risk is represented by 1. Treasury bills are assumed as riskless. These rates are
lower than that of long term government securities. It is
E(RJ =Rf+ risk premium . [4]

notable that long term government securities are more subject to inflation risk and
lower return when the investor is forced to sell before maturity.
The yearly returns on equity investment in Bangladesh have been shown in Table 7.
In estimating annual return on equities for the period from 1980-81 to 1996-97, changes
in the stock price index prepared by BB and dividend yields have been considered. The
sum of the two represents the nominal return for each year receivable for an investment
in the index at the beginning of the year. This may be considered as a proxy for the return
attainable by the 'average' equity market investor. The nominal returns are converted to
real returns through inflation adjustment. Out of 17 years the rate of real return is negative
for 3 years and the rest 14 years is positive.
83
Table 8: Estimated real return on treasury bills in Bangladesh (Percent per annum)
Year Nominal yield1 Annual inflation rate Real rate2

1980- 81 6.00 12.33 -5.64
1981- 82 8.50 16.08 -6.53
1982- 83 8.50 10.14 -1.49
1983- 84 8.50 9.51 -0.93
1984- 85 8.50 11.20 -2.43
1985- 86 9.00 9.82 -0.73
1986- 87 9.00 10.32 -1.20
1987- 88 8.00 11.43 -3.06
1988- 89 8.00 8.02 00
1989- 90 8.00 9.32 -1.21
1990- 91 7.50 8.84 -1.20
1991- 92 7.50 5.07 2.31
1992- 93 7.00 1.38 5.54
1993- 94 4.25 1.77 2.43
1994- 95 4.00 5.22 -1.16
1995- 96 3.50 4.07 -0.58
1996- 97 3.50* 5.74 -2.09
*Rates of interest on treasury bills are fixed up through auctions from 25 October 1995. However, we considered he
rate.
1. The rates quoted are at the end of june of the previous year and accordingly the figures represent the return for buying treasury bills
on july 1 and holding them for one year.
2. Real returns have been calculated through the following formula f 1 ] x 100 where r is a nominal yield and i is an annual infla
tion rate. U + / J
Table 8 shows the real rate of return on treasury bills of Bangladesh. In four years out
of 17 the real rates of return were positive and the rest 13 years were negative. Table 9
provides arithmetic mean giving the average return, standard deviation measuring the
riskiness of equity investment and the geometric mean. If the real returns of risky securities
are compared with the corresponding return on riskless treasury bill, higher returns for
risky securities are observed. The difference between the two constitutes a risk premium
- reward for risk taking in equity investment. Only three out of 17 years of investment resuts
of DSE stocks, the risk premium was negative and the rest was positive. It is evident from
these results that higher risk in equity investment is associated with a higher rate of return
and lower risk in treasury bills associated with a lower rate of return. If we compare nominal
return of risky securities with corresponding return on riskless treasury bills, we also find
similar results. Table 9 provides arithmetic mean giving the average return, standard
deviation measuring the riskiness of equity investment and also the geometric mean of real
returns. This Table shows that higher risk in equity investment is associated with a higher
real rate of return and lower risk in treasury bills associated with a lower real rate return.
84
Table 9: Estimated Real return and risk premium in Bangladesh (Figures in percent)
Year Equity shares Treasury bills Risk premium

1980- 81 4.93 -5.64 10.57
1981- 82 5.05 -6.53 11.58
1982- 83 9.01 -1.49 10.50
1983- 84 20.13 -0.93 21.06
1984- 85 23.14 -2.43 25.57
1985- 86 18.25 -0.73 18.98
1986- 87 93.79 -1.20 94.99
1987- 88 29.60 -3.06 32.66
1988- 89 6.16 00 6.16
1989- 90 -15.81 -1.21 -14.60
1990- 91 -17.61 -1.20 -16.41
1991- 92 10.62 2.31 8.31
1992- 93 8.77 5.54 3.23
1993- 94 79.56 2.43 77.13
1994- 95 -13.29 -1.16 -12.13
1995- 96 27.43 -0.58 28.01
1996- 97 29.53 -2.09 31.62
Arithmetic mean 18.78 -1.06 19.83
Standard deviation 28.70 2.73 28.38
Geometric mena 16.87 1.80 17.49
6. Discussion
The implications of these results are substantial. That is to say, the price changes of
stocks listed on the DSE - reflecting a less developed country - are likely to conform to the
general stock price behavior predicted in the finance theory. The findings of this study are
expected to deepen the insights of the academics, investors, investment analysts, policy
makers and other interested parties. One. possible implication arises with the CAPM
application is the issue of calculating the cost of capital. A popularly accepted method of
calculating cost of capital depends on the CAPM theory to defend the use of a beta. Our
empirical analysis shows this method may bring forth good results in practice. Of course,
introduction of a well designed accounting system and availability of accurate and
adequate information in time can make it better. It appears to be a good example of a
theoretically elegant model that gives a good answer for asset pricing. Anyhow, theories
and methods that are dependent on the CAPM require careful attention and scrutiny when
they are applied to the analysis of actual problems.
Capital market theory hupothesizes a number of assumptions including existence of
85
a riskless asset, perfect market, absence of transaction cost and so on. Apparently,
conditions in Bangladesh are further away from which idealized vision of the world than
in leading developed economies. Thus, the cost of capital for speculators is likely to be
higher because of repression and market imperfection in Bangladesh like other LDCs.
Information plays a very important role in security markets. Economic theory of choice
postulates that the decision maker seeks the best option out of available alternatives in
order to attain optimum results. Information influences security price formation and
thereby the optimal portfolio selection. The results of this study may raise some questions
about adequacy, nature and content of information set postulated by the capital market
theory. Information set about a company available in Bangladesh is generally inadequate
and after a relatively longer time lag than those of advanced economies. Thinness and
discontinuity in trading and above all the less developed nature of the Bangladesh markets
tends to lead lower degree of market efficiency. But information is likely to flow rapidly
among the small number of market makers who all are acquainted with each other in such
smaller markets. This fact has a special role in making the market efficient.
The contents of financial statements published by the companies of Bangladesh
include atypical annual report and account that usually present the accounting information
in the form of a comparative Balance Sheet and a comparative Manufacturing, Profit and
Loss Account of two years - current year and previous year - supplemented with a yearly
Schdule of fixed assets. Announcements are made by the companies through press for
declaration of dividend, right offer or other affairs. Besides, some press reports are there.
Companies Act and Securities and Exchange Rules (SER) of Bangladesh have provided
some rules for disclosure of company information. Although it is not precise in some
occasions, the contents, timing and quality of these statements does not fit the essence
of these rules in most cases. Although it has been stipulated in the SER to provide interim
information to the stock exchange and shareholders within one month after the end of first
six months of accounting year, shareholders in most cases, do not get any interim
information from the company on its financial performance (Ahmed et al., 1993). In the
same study it has been revealed that more than 50 per cent of the companies fail to hold
annual general meeting (AGM) within nine months after the end of their accounting year.
It implies that shareholders and other users of information do not formally get information
on corporate performance in due time. The qualitative aspect of information depends
mainly on the intention of the company rather than on rules.
The investigation of the accounts of Bangladeshi companies has revealed that in
general, public enterprise accounts are out-of-date, incomplete, poorly designed, not
86
properly consolidated, and invariably produced in English. The accounts of quoted and
other companies are only better in comparison. Banks tend rigidity to follow the prescribed
formats, with both its merits and its inadequacies. The accounts which our initial overview
indicates as best are those of the multinationals. Even here, there are deficiencies, and
we suspect the accounts would not compare well with the accounts prepared by the parent
company in the country of origin. Nevertheless, the multinationals stand out in comparison
to other categories. Although the multinational use Bangladeshi accounting expertise,
apparently no 'transfer of technology' to improve the standard of other categories of
entities is observed (Parry and Khan, 1984). The type of information provided in the annual
reports is purely historical and does not deal explicitly with risk considerations nor future
cash flows associated with equity holders' which has long been of great deal of interest to
the investors, security analysts and accountants. With the establishment of Securities and
Exchange Commission, it is expected that it will come forward with concrete measures to
promote accurate and timely information dissemination. This may accelerate the develop
ment process of the stock markets.
Capital market theory is likely to contribute substantially to explaining the behavior of
relatively efficient markets, and can be a powerful tool of analysis. The use CAPM to
allocate resources to projects of developing countries may lead to a misallocation of
resources because of the market imperfections and distortions are likely to be greater in
these countries. Its applicability in less efficient capital market seems to be much less
certain. Market imperfections may be dominant in developing markets, particularly during
their formative stages. Nevertheless, capital market theory may tend to be increasingly
relevant with the development of markets and environment. In case of a developing market
like Bangladesh the efficient market hypotheses may be, a priori, suspect for a variety of
reasons. Errunza (1977) in his paper has commented: "...However, at present, it is
doubtful whether substantial insight could be gained from application of CAPM to the
developing markets. This is because many of the LDC markets are not very active and
available LDC stock market indexes are of doubtful quality, consistency or reliability.' The
presumed 'inefficiency' implied by such markets might stem from structural as well as
institutional issues such as the following: i) in developing economies, capital markets have
difficulty in detecting and discriminating among investment opportunities; ii) composition
of outputs may respond sluggishly to changes in relative prices;iii) a dichotomy exists in
financial activities between organized and centrally controlled banks, acting loan windows
at subsidized interest rates, and private and unorganized money markets catering largely
to demands outside government control; iv) the capital markets are 'fragmented' in terms
87
of information and communication; v) temporal horizons are short; vi) investment prefer
ence is given to physical assets rather than financial assets (Shaw, 1973). This may result
in lack of financial development, particularly in capital markets, consequent upon certain
market imperfections such as transaction costs, lack of timely information, costs of
acquiring new information, and possibly greater uncertainty about the future (Goldsmith,
1969; Mason, 1972; Shaw, 1973). If some or all of these factors are operative, it is likely
to suspect that they may be reflected in market mechanisms. In general, the principle
seems to survive, although not entirely unscathed. The inefficiencies, even in organized
markets, mean that the risk is not proportional to the variance of return. Risk estimates may
be extremely hazy because of lack of information (Kitchen, 1993). Errunza (1977) has
pointed out 'portfolio suppression' (political and economic instability, monetary and fiscal
policies which result in high and unstable rates of inflation, interest rate controls, lack of
capital market institutions, high transaction costs, etc.) as obstacles to foreign portfolio
investment in the securities of developing countries. The study of Gandhi et al (1980) on
Kuwait stock markets has observed substantial scope for gains through diversification.
Agmon and Lessard (1977) have reported in a study of four stock markets in Latin America
over the period 1958-68 that risk could be diversified away to the level of about 16 percent
to 30 percent in these countries, whereas 70 percent of the risk can be diversified away
in the U.S.A. by holding a diversified portfolio. Obviously, diversification in these countries
does reduce risk, but not to the same extent as in developed countries.
7. Concluding Observations
This paper has attempted to investigate the Bangladesh securities markets. It is thus
substantially explaining the behavior of less efficient developing market like Bangladesh.
The ex post analysis based on results of the past seventeen years has documented the
gains in real terms from the equity investment in Bangladesh. The risk premium for such
investment is also higher, indicating the substantial advantage to the investors over
riskless investments in bank deposits and treasury bills. However, it is likely that the results
may differ for different time periods but the similar trend can be found if reasonably long
time period is considered. Recently, the increased public interest in the stock investment
in Bangladesh accompanied with larger volume of stock issue and stock trading augurs
well for the optimism about its growing role in financial markets than hitherto. Efforts to
speed up the development of equity segments of the market, although laudable, may not
lead to immediate tangible results in the face of the apparent riskiness of market
manipulation, structural weaknesses of the markets, political vulnerability and other
88
abuses. Closer official supervision of trading in particular and market develoment in

general may be of help in the absence of which investors are likely to justifiably feel too
exposed to various market abuses undesirably.
89
References
Agmon, T. and Lessard, D.R. (1977), 'Financial Factors and the International Expansion of Sail-Country Firms,' in
Agmon, T. and Kindleberger, CP. (Eds.), Multinationals from Small Countries, MIT Press: Cambridge,
Mass.
Ahmed, M.F.; Khan, Harun-ar-Rashid and Islam, Md. Sadiqul (1993), Industrial Financing Through Capital Market
in Bangladesh: A Study on the Demand Side, Asia Foundation and Bureau of Economic Research,
University of Dhaka: Dhaka
Ando, A. and Modigliani, F. (1963), 'The Life Cycle Hypothesis of Saving: Aggregate Implication and Tests',
American Economic Review, Vol. 53, No.1, pp. 55-84.
Arena, J. (1965), 'Post War Stock Market Changes and Consumer Spending', Review of Economics and Statistics,
Vol. 47, No. 4, pp. 379-91.
Bangladesh Bank, Economic Trends (various issues), Bangladesh Bank: Dhaka.
-(1996), Bangladesh Bank Bulletin, September-December, Bangladesh Bank: Dhaka.
-, Index Numbers of Stock Exchange Share Prices (various issues), Bangladesh Bank: Dhaka.
Bangladesh Bureau of Statistics (1993), Ministry of Planning, Government of Bangladesh, Statistical Yearbook of
Bangladesh, Bangladesh Bureau of Statistics: Dhaka.
Baumol, W. (1965), The Stock Market and Economic Efficiency, Fordham University Press: New York.
Bhatia, K. (1972), 'Capital Gains and the Aggregate Consumption Function', American Economic Review, Vol. 62,
No. 13-15, pp. 866-72.
Bichitra (National Weekly of Bangladesh) (1996), Vol. 28, 29 November (in Bengali). Calamanti, A. (1983), The
Securities Market and Underdevelopment, Finafrica: Giuffre, Milan.
Dhaka Stock Exchange (DSE), DES Factbook (various issues), DSE: Dhaka.
-DSE Monthly Review (various issues).

Drake, P. J. (1977), 'Securities Market in Less Development Countries', Journal of Development Studies, Vol. 13,
No. 2, pp. 74-91.
-(1980), Money, Finance and Development, Martin Robertson: Oxford.

-(1985), Some Reflections on Problems Affecting Securities Markets in Less Developed Countries', Savings
and Development, Vol. IX, No. 1, pp. 5-14.
Errunza, V.R., (1977), 'Gains from Portfolio Diversification into Less Developed Countries' Securities', Journal of
International Business, Vol. 8, No. 2, pp. 83-99.
90
Gandhi, D.K., Saunders A., and Woodward, R.S. (1980), Thin Capital Markets: A Case Study of the Kuwaiti Stock
Market', Applied Economics, Vol. 12, pp. 341-49.
Goldsmith, R.W. (1969), Financial Structure and Development, Yale University Press: New Haven.
Ibbotson, R.G. and Sinquefield, R.A. (1976), 'Stocks, Bonds, Bills and Inflation: Year-by-Year Historical Returns
(1926-1974)', The Journal of Business, Vol. 49, No. 1, pp. 11-47.
International Finance Corporation (IFC) (1995), Emerging Stock Market Factbook, IFC: Washington, D.C
Kitchen, R. (1993), Finance for the Developing Countries, Wiley and Sons: New York.
Malkiel, B.G. (1981), A Random Walk Down Wall Street, W.W. Norton and Company: New York.
Mason, Robert T. (1972), 'The Creation of Risk Aversion by Imperfect Capital Markets', American Economic Review,
Vol. 62, pp. 77-88.
Ministry of Finance, Government of Bangladesh, Economic Survey of Bangladesh (various issues), Dhaka.
Moore, G.H. (1975), 'Stock Prices and the Business Cycle', Journal of Portfolio Mangement, Vol. 1, No. 3, pp. 59
64.
Parkinson, J.M. (1984), 'The Nairobi Stock Exchange in the Context of Development of Kenya', Savings and
Development, vol. VIII, No. 4, pp. 363-72.
Parry, M. and Khan, F. (1984), A Survey of Published Accounts in Bangladesh, The Institute of Chartered
Accountants of Bangladesh and The United Nations Department of Technical Cooperation for Develop
ment, Dhaka.
Samuels, J.M. (1981), 'Inefficient Capital Markets and Their Implications', in Derkinderen, F.G.J. and Crum, R.L
(Eds.), Risk, Capital Costs and Project Financing Decisions, Martinus Nijhoff: Boston:The Hague/London,
pp. 129-48.
-and Yacout, N. (1981), 'Stock Exchanges in Developing Countries', Savings and Development, Vol. V, No.
4, pp. 217-32.
Seok, M.C. and Park, I. (1992), Report on the Dhaka Stock Exchange (unpublished), The Asia Foundation, Dhaka.
Shaw, Edward S. (1973), Financial Deepening in Economic Development, Oxford University Press: New York.
Wai, U.T. and Patrick, H.T. (1973), 'Stock and Bond Issues and Capital Markets in Less Developed Countries', IMF
Staff Papers, July.
Zarnowitz, V. and Boschan, C. (1975), 'Cyclical Indicators: An Evaluation of New Leading Indexes', Business
Condition Digest, pp. v-xix.
91
SAVINGS AND DEVELOPMENT - No. 1 -1998 - XXII
Abstract
Although substantial economic underpinnings consistent with market economy and
liberalization have been witnessed in Bangladesh over the past few years, development
of efficient and vibrant capital markets has not yet been attained. This study has attempted
to explore the potential impediments behind this and analyze the situation in terms of
capital market theory. Generally, the share of new equity to national savings is less than
1% in Bangladesh. The impressive increase in various government bonds and bank
deposits has been in sight while the respective yield decreases. It suggests that efforts to
speed up the development of the equity segments of the capital markets, although
laudable, may not lead to immediate tangible results in the face of various structural,
institutional and legal constraints. Even within such developing market frameworks, the
equity market behavior, by and large, appears to be consistent as the capital market theory
postulates. The ex post analysis based on the results of past seventeen years has
documented the gains in nominal and real terms from equity investment. The risk premium
associated with such investment is higher indicating the substantial advantage over the
riskless investment in treasury bills.
EVALUATION DE LA PERFORMANCE DU MARCHE BOURSIER AU BANGLADESH.
Resume
Bien que dans ces dernieres annees on ait assiste a une evolution importante de
I'economie du Bangladesh vers le marche et la liberalisation, on n'a pas encore reussi a
developper un marche des capitaux efficace et anime. Cet etude a essaye d'identifier les
obstaces potentiels qui en empechent le demarrage et d'analyser la situation d'apres la
theorie des marches des capitaux. En general, au Bangladesh, I'apport de capitaux
propres frais par rapport a I'epargne nationale est inferieura 1%. Recemment, ilyaeuune
augmentation substantielle de plusieurs obligations d'Etatetdes depots bancaires et, en
meme temps, une chute de leurs rendements respectifs ce qui semble indiquer que tout
effort pour accelerer le demarrage du segment capitaux propres du marche des capitaux,
bien que louable, pourrait ne pas donner de resultats concrets immediats a cause des
nombreuses contraintes d'ordre structure!, institutionnel et juridique. Bien que dans ce
cadre de marche en vole de developpement, la performance du marche des capitaux
propres semble evoluer de maniere coherente avec les postulats de la theorie du marche
92
des capitaux. L'analyse ex-post basee sur les resultats des dix-sept dernieres annees a
documente les gains engendres par les investissements en valeurs mobilieres a revenu
variable en termes reels et nominaux. La prime de risque plus elevee qui caracterise ce
type d'investissement demontre I'avantage important qu'il implique par rapport a
I'investissement sans risque en bons du tresor.
93

Research

Uploaded by

Copyright:

Available Formats

You might also like

Research

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Research

Uploaded by

Copyright:

Available Formats

Research Center on International Cooperation of the University of Bergamo

Giordano Dell-Amore Foundation

EQUITY MARKET PERFORMANCE IN BANGLADESH: AN EVALUATION / ÉVALUATION DE

Research Center on International Cooperation of the University of Bergamo, Giordano

2. Relative Shares of Securities in Fund Mobilization

In recent years optimism about an expeditious upgrading of the equity segment of

Corporate Bank deposits Govt. saving Total of Ratio (col. 2

(1) (2) (3) (4) (5) (6)

Figures are for calendar years.

1985- 86 466,230 58,850 194 34.3 0.007 0.33

'Figures are for calendar years.

Table 3: Ratio of saving to GDP and new equity to national saving

1985- 86 3.22 0.72

Source: Derived from Bangladesh Bureau of Statistics, Statistical Yearbood of Ban

3. Equity Market Activities in DSE

Year Market capitalization Turnover Turnover:market P/E multiples

1984 2,256 10 0.44

Table 5: Trends of transaction volume (Figures in thousand)

Year Volume Value

No. of shares Annual growth Amount in Taka Annual growth

Source: Compiled from DSE Monthly Review various issues.

4. Stock Price Indexes

Figure 1: Stock price trends in DSE

5. Returns to Equity Investment

Year Nominal equity return (%) Rate of interest2

e{Ri)Rf+e[Rm-Rf) =-. [2]

e(Ri) = Rf^i(e(km-Rf)]j . [3]

expected return on the market portfolio, and

Year Total nominal return1 Annual inflation rate2 Real return4

1980- 81 17.86 12.33 4.93

1. Data source of this column is Table-6.

E(RJ =Rf+ risk premium . [4]

Year Nominal yield1 Annual inflation rate Real rate2

Year Equity shares Treasury bills Risk premium

Arithmetic mean 18.78 -1.06 19.83

Standard deviation 28.70 2.73 28.38

Geometric mena 16.87 1.80 17.49

abuses. Closer official supervision of trading in particular and market develoment in

Bangladesh Bank, Economic Trends (various issues), Bangladesh Bank: Dhaka.

-(1996), Bangladesh Bank Bulletin, September-December, Bangladesh Bank: Dhaka.

-DSE Monthly Review (various issues).

-(1980), Money, Finance and Development, Martin Robertson: Oxford.

EVALUATION DE LA PERFORMANCE DU MARCHE BOURSIER AU BANGLADESH.

You might also like